Finding the Right Market Niche

Every company would like to market their products in the largest possible market. So just point your products at the largest possible market they can address and charge forward, right?

Wrong.

For nearly every company there are markets that are “too large”. How can that be, isn’t the larger the market the better?

In a word: “No”. For a company to really get traction and become nicely profitable, they almost always need to define a market segment in which they can be a major player–if not dominant in. The old adage “If we can only get 5% of this huge market we’ll get rich” just isn’t very accurate. The also-rans, the tertiary players in most markets usually aren’t even profitable and are just doing their best to stay afloat with their heads above water. All but the biggest SaaS and traditionally licensed software companies need to take into consideration niche size in the product planning process. (And the biggest SW companies still need to consider segment size for the opposite reason–they can’t afford to waste resources on products serving segments that won’t move their revenue needle).

So what are the most important things to consider when deciding what market segment(s) to attack with your great new technology? Let’s take a look at a few that jump to mind:

Your Level of Resources

This is the first filter to utilize because of considerations we started to discuss above. In many markets your company just won’t have enough horsepower to rise to the top, regardless of how great you think your new product idea is. Be realistic about this; remember, it’s important to define your segmentation in a way that you can be a market leader. Trust me on this–it’s far better in the software business to be a big player in a small pond than the opposite. So take an inventory of your resources–overall funding as well as development and marketing/sales–and make a cold-hearted assessment on whether this market segment is a good fit for your company, as currently configured. Maybe it’s the perfect niche for you now–or maybe it’s something you should hold off on and keep on your radar to tackle somewhere down the road. But don’t let your “eyes be bigger than your stomach”, or you may really stunt your company’s development by entering a market segment it’s not yet ready to handle.

Segment Competition Level

The second thing I’d look at is the competition level in your target segment. Are there a lot–maybe too many–competitors for the size of the segment?. Even if there is enough business to go around, if there are a lot of competitors, it can be hard to get attention as a new player in a segment–even if you don’t consider the competitors all that strong. Are there several strong competitors, with good products and high market share? This presents even a bigger problem for a new entrant. If both of these situations exist simultaneously, be really careful. In that case it may be a segment to steer clear of for the time being. It’s critically important to not underestimate the competition; by being there first they’ve got a lot of advantages over you as a new entrant. Don’t be overconfident. Before jumping in, I recommend that you spend considerable time and effort fully analyzing the existing competitors. Personally, I like to pick segments (when at all possible) where I feel I have a clear product advantage of some sort (or some other major proprietary advantage) before entering a new segment.

Market Segment Experience

Of course, it’s better to choose a market segment where you know the lay of the land and have some existing contacts–than not. Sometimes this can be a little-overblown, though. I’ve moved into many markets where I previously had no experience or contacts with great success. And in the software/tech business, things can change very quickly. If you aren’t open to recognizing change, that “existing market knowledge” might already be dated and that knowledge that gives you so much comfort can actually work against you. Imo, it’s usually far more important to have the ability to go into a market segment and size it up accurately and quickly, than it is to have actual experience there. But all things considered, assuming you don’t get over-confident in your market knowledge, having existing contacts and past experience in a market segment can be very helpful.

Market Maturity

It’s great have a good understanding of the size of the market, but how long it’s been around as an identifiable segment as well as the current penetration rate is very important as well. This is an attribute that often doesn’t get sufficient consideration when segmenting markets for software products. It’s great that the market size is $XXX million or billion. But how much of it is ‘virgin” territory and how much of the market is “replacement”? There are pros and cons of trying to market into each of these customer types. Customers may be much easier to identify in replacement segments, but it’s often much easier to sell into in virgin segments once you’ve been able to identify appropriate customers. In general I greatly prefer virgin territory, especially for relatively young companies–for a lot of reasons that will need to wait for another article. The exception is when you have developed a product which is very easily comparable to the products in an existing replacement segment–BUT FAR SUPERIOR in price/performance. As I said above, this is a topic that could easily justify a separate article–but in any case, one that should receive more consideration than most folks give it.

Is Your Technology Really GREAT?

After all I’ve said above, I’m going to contradict it–a bit. What if you have truly new, breakthrough type of technology? I’m referring to the kind of technology that gives you a 1-2 year lead in almost any segment that it’s applicable to. If this is really the case, it can go a LONG way toward overcoming the things to be careful about that I’ve outlined above. In this circumstance I lean toward being more aggressive when picking segments to enter. Because when you’ve got a huge product advantage it gives you an opportunity to defeat larger, more entrenched competitors as well as market more effectively in bigger segments. That’s because in this situation nearly EVERYTHING works better. Your marketing is much more efficient because you can get a lot of highly effective (and free) PR, there is more word-of-mouth (also free) and so on. In fact, with very strong technology I want to exploit it in the largest realistic segment as soon as possible. In this case it’s better to strike fast while you still have a large lead, before you give those stronger competitors a time to catch up on the product side. Hopefully, by the time they do you will have become well-entrenched yourself. The obvious caveat here is to make sure you’re objective and realistic about what you really have on the technology side. If you start believing your own hype–and it’s not real–you’re likely to be smashed like a bug on a windshield.

In summary, most companies don’t start out with the market stature of Microsoft or Google–and shouldn’t pretend they are. When starting out, pick a niche you think you can dominate. Dominate it, then pick the next (bigger) niche that you feel you can dominate with your now greater level or resources and brand. Rinse and repeat. Do that long enough and maybe you WILL someday be picking the largest market segment possible for your products.

That’s what I think about niche software marketing. What do you think? Post a comment to fill us in.

About Phil Morettini

Phil Morettini is the author of the Morettini on Management Tech Blog and President of PJM Consulting. Mr. Morettini has an extensive C-level software and hardware company executive background. PJM Consulting provides management consulting and interim management services to technology companies.

Comments

Phil, another fantastic article that speaks precisely to what we’ve done with our EdTech NewCo. We had a high-calibre entry into a niche B2B enterprise market that’s been poorly served, a few competitors (who we are beginning to outshine, in different ways) and a value prop that sets us apart as a comprehensive product in a land where many of our customers deal with fragmented solutions that they are trying to kluge together, usually unsuccessfully. It’s so great to get advice from someone who knows exactly what we’re dealing with, and very validating to hear that we’re basically doing it right so far. Please keep writing these the great articles! Thanks.

Hi Phil,
We are currently working in a fragmented new market and are finding it very difficult to figure out our competition. We seem to be coming across small players trying to rustle business with a low cost strategy for small value projects which we normally lose. At the same time we are working with few large customers looking at customized solutions and willing to pay for it.
Being a new technology in India and being a start up it is hard to decide which market to follow up with.
I look forward to hearing your thoughts

Nipun, thanks for reading and for your comment. Unfortunately, with just a couple of sentences of information, whatever I say has a great chance of being wrong. Advice “by comments” on complex topics is not very good practice and can be dangerous. When you’re new and need sales the tendency is to chase every type of deal that’s in your neighborhood. Unfortunately, taken to an extreme this will often prevent you from focusing on an area where you can develop a differential advantage to win consistently. What’s important is that you need to find where your technology best fits and really focus on it. I realize that’s easier said than done. Sorry I can’t be more helpful than this in this sort of forum–unfortunately it’s not a straightforward, easy question. The devil’s in the details here, which would take quite a bit of discussion and study to provide sound, detailed advice.

Hi Phil, very interesting article I think it’s a great summary of a lot of important points to consider. One area I would like to agree and extend your comments on is the consideration of entering mature markets. As you mention if you enter that market with a product with very superior price/performance it is possible to take share from existing competitors. I’m not sure if you would agree, but as the enterprise software is increasingly implemented more quickly, with less customization it becomes easier for companies to consider change for better cost and service. (While this trend does not require SaaS models they are accelerating the trend.) If a large company faces a high cost, multi-year SI and roll-out effort for a new system they will be far more hesitant than if they can get the first phase in a short time to a subset of users and proceed with a phased transition. So I would add that if a software company is entering a market with entrenched competitors the price/performance of their offer has to be superior, including consideration of how companies can migrate or transition to the new, better solution.
Thanks for posting this.

Jim, nice point. SaaS is obviously driving a sea change in the software industry. As you point out since it can reduce the “friction” associated with changing it definitely is a factor that can allow a new competitor to win easier.

Phil,
What an extraordinary and insightful article. I have seen far too many companies attempt to boil the ocean with a candle (market size vs. budget) and wonder why they didn’t get traction. I have never seen the strategy you are teaching here is in a text book, even at the MBA level. Brian Tracy does teaches us that “THINKING” leads to the best strategies. Thank you for thinking out loud and sharing your experience.

This is a lengthy topic which I’ve written a number of other articles on, specifically selling/marketing to international markets. I can’t do it justice in a reply to a comment, so feel free to search the blog for other articles. But in short, you must be totally ready and able to market to that other culture, language and business tradition JUST AS IF YOU ARE A NATIVE MEMBER of that group. For example, in the US you can’t have “broken english”, “British-English”, non-translated web pages, software that isn’t properly translated. In other market handling of double byte characters, basic understanding of business customs, etc. A personalized example for you. On your website when I click on the british flag, the top half of the webpage is translated into English but the bottom part still appears in Turkish. This pretty much tells any prospective customer that you don’t have real experience selling into english language markets. You basically can’t afford ANY slip-ups like this when entering a foreign market if you want to have a decent chance of success. Hiring company personnel or a consultant in the target market can be helpful to make sure you are doing the right things.